UK plans for DB pensions overhaul sparks industry concerns

The UK government’s green paper on defined benefit pension schemes, which includes plans for defined benefit “superfund” to assist smaller DB schemes, has sparked a series of industry concerns.

The 106-page document, published earlier today by The Department of Work and Pensions, has set out a series of solutions to what it considered the four main problem areas: funding and investment; scheme affordability; member protection; and consolidation.

The Green Paper will be followed up in March with a formal document to cement the changes to the UK’s controversial DB pension schemes in a bid to safeguard millions of UK pension holders, while at the same time, give support to smaller schemes that might struggle without changes being made.

However, the Green Paper outlined that any “superfund” should probably be a voluntary initiative, and not be run directly by the government.

‘Confidence’

Pensions minister Richard Harrington, said: “People need to have confidence in their pension and it is vital that they feel that they are secure.

“With recent high profile cases highlighting the risks inherent in defined benefit pensions, we want to ensure that these important pension schemes remain sustainable for the future and that the right protections are in place for members.”

Pensions specialists AJ Bell said that while the call for evidence avoids drawing any firm conclusions or proposing specific reforms, it discusses some potentially controversial ideas – including allowing DB schemes to reduce the value of accrued pensions by changing indexation (from RPI to CPI) or suspending indexation altogether where the scheme is distressed.

‘£90bn high-wire balancing act’

Tom Selby, senior analyst at AJ Bell, likened the UK government’s plans to that of “performing a £90bn high-wire balancing act” on defined benefit pensions. “While allowing scheme sponsors to slash liabilities, possibly by switching from RPI to CPI indexation or suspending indexation altogether in certain circumstances, could preserve guaranteed pensions for more people, it would also more than likely reduce the value of these pensions and potentially whip up a storm of protest from trade unions.

“Clearly the case of BHS and Sir Philip Green looms large here, but equally ministers will be concerned about generating headlines suggesting accrued rights are under threat. Pension promises already built up have historically been sacrosanct, so even a seemingly innocuous reduction in benefits could be viewed as the thin end of the wedge and stir up controversy.

Selby adds that the Green Paper avoids setting any firm direction of travel, and instead attempts to set the scene of what is likely to be a fierce debate on the future of DB pensions.

‘Wider implications’

“Any formal proposals further down the line will need to consider not only any direct impact on DB members and schemes, but also the wider implications for trust in the UK pensions system as a whole.”

Graham Vidler, Director of External Affairs, Pensions and Lifetime Savings Association, welcomed the Green Paper’s content, as, he says, it a”sks the questions necessary to move forward” the increasingly pressing debate about the future of defined benefit pensions in the UK.

“We firmly support the Government’s desire to explore consolidation as a way to secure the defined benefit pensions of millions of savers. The DB Taskforce’s next report, to be published in March, will look at consolidation in more detail,” he said.

Rachael Griffin, a tax and financial planning expert at Old Mutual Wealth, predicted that the UK government “undoubtedly” faces a consumer and trade union backlash against these proposal, despite the fact they appear to be a long way away from making a conclusion.

‘Contentious point’

“The government’s paper stimulates a much-needed discussion relating to the future funding of this type of pension scheme in the private sector. However, the possibility of using a new measure of inflation or even allowing schemes to suspend inflation indexation altogether will be a contentious point.

“It would be likely to save money for businesses while at the same time reducing pensions for scheme members. Similar measures have been considered in the past but did not gain traction because the was partly concerned about a backlash from millions of pension holders,” she said.

Overall, the long-awaited green paper was positive about the state of the UK’s DB pension schemes, despite negative headlines of recent months. The Green Paper stated: “Whilst recognising that the system may not be operating optimally in all areas, our main conclusion is that there is not a significant structural problem with the regulatory and legislative framework.”